Japan's ruling LDP will sign a coalition deal later Monday, its new partner party said, paving the way for Sanae Takaichi to become the country's first woman premier and lifting the Nikkei to a new record.
The 11th-hour announcement by the Japan Innovation Party (JIP) came just a day before the lower house was due to vote on Takaichi's appointment as the fifth prime minister in as many years.
"After giving it careful thought last night, I telephoned (LDP) president Takaichi this morning to reach a coalition agreement," said Hirofumi Yoshimura, JIP co-head.
"At 6:00 pm, we will formally sign the agreement," he told reporters.
Takaichi, 64, seen as a China hawk and traditionalist from the right wing of the ruling Liberal Democratic Party (LDP), won the party leadership this month.
But her bid to become premier was derailed by the collapse of the LDP's coalition with the Komeito party after 26 years.
Komeito said the LDP had failed to tighten party funding rules following a damaging slush fund scandal.
It was also unnerved by Takaichi's previous harsh rhetoric on China and her regular visits to a Tokyo shrine that honours Japan's war dead, including war criminals.
The clock was ticking for Takaichi to be appointed.
US President Donald Trump is due to visit at the end of the month on his way to the Asia-Pacific Economic Cooperation (APEC) summit in South Korea.
Details of a trade deal between Washington and Tokyo remain unresolved, and Trump also wants Japan to stop Russian energy imports and boost defence spending.
The LDP's new coalition with JIP is still two seats shy of the lower house majority needed for Takaichi to be appointed.
But Takaichi is still likely to win since in a second-round run-off vote she only needs more support than the other candidate.
The announcement of a new coalition pushed the Nikkei 225 index up more than three percent to a new record above 49,000 points.
Yutaka Miura, analyst at Mizuho Securities, said that investors were cheered by hopes of "proactive fiscal policies" by Takaichi, Bloomberg reported.
Takaichi has in the past backed aggressive monetary easing and expanded government spending, apeing the "Abenomics" named after her mentor, former premier Shinzo Abe.
During the leadership campaign, Takaichi toned down her rhetoric both on the economy and on China.
Being in a minority in both houses of parliament, the new coalition will need support from other parties to push through legislation.
The JIP wants to lower the consumption tax rate on food to zero and to abolish corporate and organisational donations, Kyodo News reported Sunday.
The smaller party is also in favour of reducing the number of lawmakers. Reports say it will not hold any ministerial posts in Takaichi's cabinet.
Besides handling Trump, Takaichi's many challenges ahead will include addressing the slow-burning crisis of Japan's falling population and boosting its flatlining economy.
Takaichi will also be under pressure to halt the steady slide in support for the LDP, which has governed Japan almost non-stop since 1955.
Smaller parties gaining support include the populist Sanseito, which calls immigration a "silent invasion", even though foreign-born residents make up only around three percent of the population.
